21Sep/110
Calculating your credit score
A credit score measures the likelihood that someone will pay bills in a timely manner. This score is taken into account by lenders when a person applies for credit cards, insurance policies, mortgages, bank loans and car loans. A common scale used for scoring credit in the United States is the FICO, which was originated through the Fair Isaac Corporation. The FICO scale ranges from 300 (bad credit) to 850 (excellent credit), with the majority of Americans falling into the 600-800 range. Some of the factors used to determine one`s credit score are as follows:
Paying Bills On Time A person`s track record of paying bills on time is a highly important measurement, accounting for 35% of one`s total credit score. FICO determines this part of a credit score by examining an individual`s history in regard to making bill payments. Points are deducted for those who frequently pay bills late or who have had issues with collection agencies or bankruptcy. Available Credit and Outstanding Debt Thirty percent of an individual`s credit score is determined by that person`s amount of available credit (the credit limits on existing cards) and amount of outstanding debt. If a person owes a significant amount of money to home lenders, auto lenders or credit card companies, a final credit score may be affected negatively. Similarly, if a person has an excessive amount of credit available, FICO considers that person to be a potential risk for big spending. The best way to achieve a high score in this area is to use credit occasionally rather than maxing out limits, or not use credit at all. Credit History FICO looks favorably upon individuals who have done business with the same credit lenders over a long period of time. The longer that one has successfully used credit, the more likely it is that a high credit score will be achieved. Credit history accounts for 15% of the total credit score. Applications For New Credit People who have a solid history of paying debts on time are scored favorably if they have a pattern of applying for new types of credit. Consumers who prefer to shop around for the lowest loan rates can gain points that comprise 10% of the final FICO credit score. However, if one tends to run late on making payments or to avoid making them, applications for new lines of credit are detrimental to the overall score. Types of Existing Credit Ten percent of one`s credit score is measured according to the diversity of that person`s existing credit lines. Those who are responsibly able to manage loan payments and credit card payments simultaneously are considered by FICO to be good credit risks. Consumers should periodically review their credit scores to ensure that they are in a good position to apply for loans or enter into financial agreements. A good way to keep one`s credit score on track is to figure out in advance if a purchase is affordable. For example, using a <a href="http://www.simplyfinance.co.uk/calculators/mortgage-cost-calculator.html">mortgage calculator</a> will determine if one can manage monthly payments on a home.
[tags]Bad Credit, Credit Repair, Credit Score[/tags]